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Sheila Bair: Dodd bill 'makes [bailouts] impossible'

As head of the FDIC, Bush appointee Sheila Bair is in charge of dismantling failed banks. As The Hill wrote, Bair has been fiercely critical of the pro-bank shape of the financial rescue. "Market discipline," she's said, "must be more than a philosophy to ward off appropriate regulation during good times. It must be enforced during difficult times." So she has some real credibility on the issue of bailouts. And in an interview with American Banker's Rob Blackwell, she says the Dodd bill prohibits bailouts. Full stop.

Would this bill perpetuate bailouts?

SHEILA BAIR: The status quo is bailouts. That's what we have now. If you don't do anything, you are going to keep having bailouts. Bankruptcy doesn't work — we saw that with Lehman Brothers.

But does this bill stop them from happening?

BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can't bail out an individual institution — you just can't do it.

In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.

Critics say the bill would let the FDIC pick and choose creditors to pay back in a resolution. Is that a form of a bailout?

BAIR: We've always had that. You close a bank, you set up a bridge bank, and you have IT service providers, property upkeep — they are general creditors. You want to keep paying them to keep the services going.

That's just an example. You need to keep that kind of thing going to maintain the franchise value. You have the power to do that in bankruptcy too.

The FDIC will provide detailed disclosure of any creditor that receives more than others of the same class. Let's be clear, this is limited only to those essential to maintain critical functions and preserve value of assets to benefit all creditors. It will not include bondholders or shareholders.

By Ezra Klein  |  April 15, 2010; 4:10 PM ET
Categories:  Financial Regulation  
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Wait, I'm confused. Does this mean that the GOP talking point crafted by Frank Luntz is a lie? The one about how the new bill is all about bailouts?

Say it ain't so, Joe. I'm just aghast that the Minority leader would lie to a TeeVee camera, much less to the American people.

Posted by: RalfW | April 15, 2010 4:30 PM | Report abuse

Since these statements will surely lead to cries that Bair is a liberal fascist socialist Obamabot, its probably worth pointing out that not only was Bair a Bush appointee, she's a lifelong, active Republican. She's from Kansas. She worked in Bob Dole's office for 8 years. She ran for Congress as a Republican (and almost won the primary). And she worked in the Bush Adminstration Treasury Dept.

Posted by: vvf2 | April 15, 2010 4:57 PM | Report abuse

RalfW - That is some quality sarcasm. Kudos!

But really, your use of the word "leader" is a little over the top, don't you think?

Posted by: nisleib | April 15, 2010 4:59 PM | Report abuse

'The Maginot line will make German invasions impossible'

Not a criticism of the bill per se, just saying I'm very skepitcal when a government official says something is made impossible by fiat.

Remember, TARP made it through Congress. If a future TARP was ever perceived as necessary, couldn't Congress just vote down this round of FinReg so that they could bail out the banks without breaking the law if they wanted to?

That's why I like contingent debt. Once Contingent debt is on the banks balance sheets its there - although I suppose nothing is stopping Congress from taking away the requirement to have contingent debt in future legislation.

Posted by: justin84 | April 15, 2010 6:03 PM | Report abuse

OK FIRST - it appeared there was going to be a bipartisan bill - with Sen Corker of TN negotiating with Chris Dodd

Then Obama pulls out of the negotiations and says he is going to have his own bill -

ONLY Obama decides that in addition, he is going to try to blame the Republicans for supporting the Wall Street Banks - and try to make the whole thing a campaign issue against the Republicans.

AFTER going through BIPARTISAN negotiations.

So the Republicans go to the floor of the Senate and accuse Obama of cozying up to the Wall Street Banks, which is probably true - and they all have a fight.


Is there any other way that Obama can VIOLATE HIS OWN CAMPAIGN PLEDGES.

AND THEN you have Stern of SEIU making an issue with North Carolina Congressmen about violating campaign pledges.

What a complete joke.


Posted by: 37thand0street | April 15, 2010 7:14 PM | Report abuse

37th: Just what world are you living in? You have the WHOLE set of steps wrong, many of them completely opposite.
Dodd abandoned his negotiations with Corker because Corker wanted a bill so weak it was useless. So much for bipartisanship.
The Republicans met with the Wall Street bankers and TOLD them that they were going to weaken the bill as much as possible and then would come to them for contributions! Now that is BLATANT cozying!
Haven't you heard of the Frank Luntz letter on how to pull the wool over the base's eyes?
When you can get reality straight, you might win a bit of credibility.

Go to Snopes or Politicheck and get the real facts; or read the editorial in the Kentucky newspaper lambasting Senator McConnell for lying about this bill!

Posted by: DonB2 | April 15, 2010 10:26 PM | Report abuse

The Luntz memo can be found, among other places including the Huffington Post, where it first appeared, at:

Enjoy the read, it is only 40 pages.

Posted by: DonB2 | April 15, 2010 10:48 PM | Report abuse

One of the reasons that the FDIC's resolution authority tends to work is because it collects sufficient fees to provide a back-stop in the event of failure. Tax-payers and other banks are insulated, because there is effectively a rainy-day fund to draw on in the event of a crisis.

I understand that a $50 billion fund is in the Senate bill and a $100 billion fund is in the House bill. The White House for some reason opposes any fund. I guess the question here is: What is the necessary amount in order to back-stop the mega banks?

What is the basis for the $50 bill. or $100 bill. numbers?

A related point: Technically the bills may outline a resolution process; however, if that process doesn't manage size, and if it doesn't provide a dedicated fund to handle failures, then it would seem that the alternative remains something pretty close to the status quo (e.g. the choice is to provide emergency tax-payer support, or to let the banks fail and risk having the contagion spread -- especially problematic with the Bigs).

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